Boat blues: Demand for Gulf OSVs remains soft

The multipurpose field support vessel Harvey Stone is one of the types of specialized offshore service vessels most likely to attract demand as the gulf deepwater and ultradeepwater market recovers. Eastern Shipbuilding Group photo.

Now in its third year, the depressed U.S. offshore service vessel industry is nowhere near a recovery. Newbuild activity in the past year ramped downward, as operators large and small fought to hang on.

The WorkBoat 2016-2017 construction survey counted 31 new OSVs under construction, down 40% from 2015 numbers.

That was in a year that saw almost half of the existing Gulf of Mexico fleet stacked, as oil prices continued to hover around $50 bbl.

On the U.S. mainland, producers wringing out new efficiencies from their fields made money at those prices, partly negating the effort by the Organization of Petroleum Exporting Countries to reduce the global oil glut.

While some Americans cheered OPEC’s frustration and lower gas prices at the pump, there was no cheering coming from the U.S. offshore industry and its workers. Todd Hornbeck, president and CEO of Hornbeck Offshore Services Inc., Covington, La., summed up the situation in a Feb. 16 earnings call with analysts.

“Earlier in this cycle, the industry mantra was lower for longer. The message we have recently been hearing from our customers, almost uniformly, is that they now see oil prices as lower forever,” said Hornbeck.

“They no longer view this as a U-shape recovery, but an L-shaped recovery, or so we’re told. Deepwater projects can work in that kind of world, but not at economics that drive key pieces of the supply chain out of business. Lower forever must also mean greater efficiencies and reliability in this supply chain.”

The HOS Warhorse, an MPSV for Hornbeck Offshore Services, was launched in November 2016 at Gulf Island Shipyards. Gulf Island photo.

In that grim environment, shipyards are finishing a few state-of-the-art vessels for major operators. Gulf Island Shipyards LLC, Houma, La., in November launched HOS Warhorse, the first of two 365′, 6,265-dwt multipurpose supply vessels (MPSVs) for Hornbeck. Equipped with 250-MT and 110-MT large heave-compensated cranes, a 15’×18′ moon pool, two remotely operated vehicles (ROVs) and with accommodations for 102 personnel, the vessel is certified for worldwide operations. It has tankage for 14,115 bbls. of liquid mud.

Gulf Island has a pair of 300’×62’×24′ platform supply vessels scheduled for delivery this year to New Orleans-based Tidewater. Tidewater filed for Chapter 11 bankruptcy in mid-May.

In the first quarter Tidewater was in the midst of negotiations with its lenders and noteholder, as the leading worldwide operator sought to restructure debt. In early April, the company said it was close to making new lender and noteholder arrangements. Tidewater had 148 active vessels worldwide and 116 stacked at the end of 2016, company officials said in a Feb. 8 earnings call with analysts. Vessel revenues of $125 million were down 41% in the December quarter from a year before, said Tidewater CEO Jeff Platt. Utilization of the active fleet was about 74%, up about 4.5% quarter over quarter, with average day rates around $12,500 down by about $900 a day or 7% quarter to quarter – slightly better than expected, Platt said.

“Early on, we stated that we and our customers would need to learn to live in a world of lower oil prices,” Platt said.

“Initially, the downturn was cushioned by the existence of long-term drilling rig and vessel contracts, but as we warned, there was already an oversupply of drilling rigs and OSVs, with many more under construction,” said Platt.

At the time, Tidewater was approaching the end of a fleet renewal program that had added more than 160 new vessels over the past 10 years, bringing down the average age of the fleet to less than nine years.

“Our new, young fleet, coupled with the broadest geographic footprint in the industry, positioned us well we thought for weathering the extent of the downturn we initially envisioned,” Platt said.

But the continued decline in oil prices, bottoming out in the mid $20s during February, made it clear this was no short-term downturn, he added.

Survival Mode

The low prices and inevitable shakeout appears likely to continue into 2018, with less work and lower day rates stressing operators that are close to just covering costs. Industry observers say it is the hangover from the 2005 to 2014 boom years. “On the vessel supply side of the equation, over the last decade, our industry built new-generation, high-spec OSVs to service a 50-plus deepwater drilling unit market. That’s just in the Gulf of Mexico … we are well shy of a 50-rig market,” Todd Hornbeck said in his company’s last earnings call.

“Yet, the vessels available to work are still here and actually grew in number over the course of 2016, as the remainder of previously ordered supply vessels were delivered from shipyards.”

Hornbeck counted 194 “high-spec, new-generation vessels in the Gulf of Mexico market,” with roughly half of those stacked. Still the market is oversupplied and “is not one that operates on rational business principles,” he said.

“Instead, even cash-strapped competitors are burning what little cash they have to charter vessels at rates below their cash operating costs,” Hornbeck said.

Hornbeck said his company will be one of those left standing, because “value creation in the offshore vessel space cannot begin, again, without meaningful acquisitions of high-spec assets and businesses over the overleveraged industry players.”

Hornbeck said one potential bright spot is multipurpose vessels, as inspection, maintenance and repair (IRM) work cannot be put off for long.

With consolidation, and likely shrinking and scrapping ahead, it will be a lean time for building new OSVs.

“We have a young fleet again, and it’s all stacked. Why would anyone build a new boat?” said Stephen J. Berthold, vice president of sales and marketing at Eastern Shipbuilding Group, Panama City, Fla. “I hate to be a naysayer, but if you look at history, the last time we built up the fleet, it took a decade to work out.

“The current PSV market started in 2001, so, if you go from 1986, the last crash (in oil), in 2001, that’s 15 years,” Berthold said. After building from 2001 to 2005, “2005 to 2014 was pretty much full throttle,” he said.

Those wave patterns closely follow oil prices, and the newbuild slide was precipitous when oil plunged from $105 bbl. in June 2014 to $59 bbl. that December, according to the Energy Information Administration.

During the recent OSV building boom, Eastern built oil service vessels for several operators. David Krapf photo.

Eastern’s last projects for the offshore market are multipurpose field support vessels (MPFSVs) for Harvey Gulf International Marine, New Orleans, due for delivery in mid-2017. The first, the Harvey Stone, is a 212’7″×59’1″×25’7″ Rampage 6400 MPFSV designed by Robert Allan Ltd., Vancouver, British Columbia, that was launched from Eastern’s Allanton, Fla., facility in December. The next two are the Harvey Sub-Sea and the Harvey Blue-Sea, being built to a Vard Marine design.

Those three Harvey boats are the last OSVs Eastern expects to build for a while, and likely to be the type of high-end vessels that will be built whenever the industry recovers.

“After that, that’s just about it for us” in the OSV market for the foreseeable future, Berthold said. “Unless they’re specialized vessels, it’s going to be a tough business. It’s very, very competitive.

“Being a diverse shipyard here at Eastern, we learned our lesson back in ’86” and have since diversified, he added.

The company now has plenty of work in other workboat sectors, Berthold said.

About the author

Associate Editor Kirk Moore was a reporter for the Asbury Park Press for over 30 years before joining WorkBoat in 2015. He wrote several award-winning stories on marine, environmental, coastal and military issues that helped drive federal and state government policy changes. He has also been a field editor for WorkBoat’s sister publication, National Fisherman, for almost 25 years. Moore was awarded the Online News Association 2011 Knight Award for Public Service for the “Barnegat Bay Under Stress,” 2010 series that led to the New Jersey state government’s restoration plan. He lives in West Creek, N.J.